Conference general session addresses project financing

By Erin Voegele | January 17, 2012

Attracting investment is a primary concern for all biomass technology development companies, whether related to bio-based power, fuels or chemicals. Attendees at the 2012 Pacific West Biomass Conference & Trade show in San Francisco, Calif., Jan. 16-18 had the opportunity to learn about current trends in financing mechanisms during the event’s opening general session.

The panel, titled “Financing Strategies for Biomass Derived, Energy, Fuels and Chemicals in a Tight Capital Market,” offered attendees three very different investment perspectives.

Bill Lemon, senior vice president of investment banking at Source Capital Group Inc., opened the discussion by noting that biomass developers are in the big leagues now, and attracting investment will be a challenge. “There is a lot of money at stake, lots of technical complications, political complications, and lots of headaches,” he said. “But, the basics of good projects haven’t changed.”

One of the most important things a biomass company can do is de-risk its projects. Developers must also find quality parties and partners to work with, Lemon said. “In classic project finance style, this is about execution over innovation,” he continued.

During his presentation, Lemon described a variety of different investor types and their roles in a project’s development process. “There are private investors, and there are technology venture investors,” he said. “There really are very, very few private equity venture investors. It’s an animal that basically doesn’t exist. [For this reason], putting risky technology in a project you hope to get financing for is not a winning strategy.”

Rather, Lemon said, different types of investors are attracted to different aspects of a project. Developers need to understand the type of investor they are hoping to attract, he continued. For example, project debt investors are not going to want to invest in a risky project that has the opportunity to be stupendously successful, he said. This is because even if the project becomes very successful, the debt investor will only get the principle and interest back as a return. Alternatively, if the risky project fails, they don’t get anything. In other words, the potential risk is not outweighed by the potential payoff.

Tax equity investors, on the other hand, are not looking for cash returns. They are looking for opportunities to make use of credits or special deprecation that a relatively small project with a modest profitability can’t efficiently use in a timely fashion, Lemon said. For that reason, tax equity investors are generally mid-term investors. However, as tax-related incentives for biomass projects draw down, Lemon said that classic private equity investors—who understand energy and have been good investors in the fossil fuel sector—now have a more even footing to play on.

Lemon also addressed the potential of loan guarantees and grant programs. “To an extent, over the past year or two, they liked the transformative technologies,” he said. “These days I think the three most important criteria are jobs, jobs, and jobs.”

Overall, when trying to attract investment, Lemon said biomass companies need to take advantage of their strengths when trying to attract funds. To do that, they need to understand what the strongest points of a project will be when looking through an investor’s eyes. “We also need to figure out what the investor looks at as a potential weakness in a project, and what we can do to mitigate that,” Lemon said.

John May, managing director at Stern Brothers and Co., also participated in the general session discussion. According to May, biomass projects have traditionally trailed behind other types of renewable energy when it comes to access to capital. He also noted that the bond market is wide open. “It’s a trillion dollar market, it’s very liquid…and it’s a market that will look at projects that are trying to get technology commercialized…or trying to scale,” he said.

New biomass conversion and energy projects will seem risky in an investor’s eyes, May continued. “The issue is how can we attack the perception of that risk, and how do we mitigate that risk,” he said. “I think [the reason] we haven’t gotten that many biomass projects financed with non-recourse debt and with traditional institutional equity is we haven’t solved that problem yet.”

The risk associated with biomass feedstock is the bane of investment bankers, May said. They are nervous that the margins of the developer are going to be impacted by some aspect of the feedstock component and that the developer is not going to be able to pay debt service. He also noted that there are significant challenges associated with the formation of off-take agreements for fuels and chemicals.

Technology risk can be dealt with in several ways, May continued. For example, programs like the USDA’s loan guarantee program can help mitigate that risk. May also noted that some insurance companies have been mitigating technology risk in the solar and wind sectors for some time.

One trend that May said he has identified is biofuel and biomass projects transitioning to biochemical production because the margins are much higher. “We’re seeing that with a lot of clients,” he said. “The whole idea of the biorefinery is you can produce a bunch of products from your technology. The idea is to have the ability to go to the highest value project and make the economics work.”

The general session also featured a presentation by Paul Tantillo, managing member of Enervation Advisors LLC. Tantillo’s firm focuses on the purchase of distressed assets, and recently began significant work within the biodiesel industry. He described what Enervation Advisors does as rescue lending, and noted his firm acts as a partner to get operations back up and running.

When taking on a new distressed asset, Tantillo said the first step is to evaluate the technology. “We like to fix it, if that’s the problem,” he said, adding that the firm actually hopes money—not technology—is the problem. After a significant amount of due diligence, the company puts a plan together to save the asset, exclusively using its own capital whenever possible. After finding success in the biodiesel sector, Tantillo said his firm is now entering the biomass space.

During his presentation, Tantillo described several ways in which a company can better attract interest from his firm and other potential investors. Most important, he said developers should to be bold, but also honest and direct. Don’t sugarcoat the situation, he said. If the pitch seems too good to be true, it probably is.

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